Prosper Reboots With a New CEO and New Funding

There is some really big news out of Prosper today. They have not only received a new $20 million round of financing but there has also been a management change at the top of the company.

Interim CEO Dawn Lepore has resigned and been replaced by new CEO Stephan Vermut. Prosper has also named a separate president for the first time – that title has been held by the CEO until now. Aaron Vermut will become the president once he transitions out of his current position. Also coming on board is Ron Suber as Head of Global Institutional Sales. All three executives have worked together at Merlin Securities, a prime brokerage services firm that was acquired by Wells Fargo in July 2012.

A New Round of VC Funding Headed by Sequoia Capital

There is probably no bigger name in the Silicon Valley venture capital community than Sequoia Capital. They have funded some of the most successful names in business today including Apple, Google, Cisco, PayPal and Oracle just to name a few. Now, they will be adding Prosper to their portfolio of companies.

Sequoia Capital is leading a $20 million round that includes funding from all existing investors as well as the three new executives. Sequoia Capital Partner Pat Grady will join the Prosper Board of Directors along with new CEO Stephan Vermut. This reconstituted board was made possible after the resignations of David Silverman and Larry Cheng last month.

[Update: Prosper released their Form 8-K after I published this article and it should be pointed out that there is going to be a completely new Board of Directors. Founder Chris Larsen, Timothy Draper, Gary B. Coursey, Nigel Morris and Eric Schwartz have also resigned as members of the Board, effective January 14, 2013.]

A New Beginning for Prosper

This marks an exciting new chapter for Prosper. They will have a new look executive team that should bring some renewed vigor and energy to the company. I happen to know Ron Suber, Prosper’s new Head of Global Institutional Sales, who has been a reader of this blog for some time and we have communicated several times over the past year. In our conversation yesterday he stressed that the new management team will bring a clear vision, passion and creativity to Prosper and the p2p lending space.

They have a “100-day plan” of goals for their first hundred days and a list of nine things Prosper needs to do to reestablish itself. Suber is also going to bring a renewed focus to the investor side of Prosper’s business particularly when it comes to institutional investors. But he has assured me that retail investors will also be a priority.

My Take on This Change

While I have known a new round of funding was coming (although I was pleasantly surprised at the size of the round) I had no idea about the management changes until my phone conversation with Ron Suber yesterday. These changes have the potential to propel Prosper forward on to a new trajectory of growth.

The one piece that has been concerning some investors is the class action lawsuit against Prosper. The suit is still ongoing and the new management team would not comment on this matter but based on the new round of funding clearly the lawyers at Sequoia Capital are not too concerned about it.

Last year Lending Club caught all the headlines for their astounding growth and high profile boardnominations. No doubt they will continue to do well in 2013. But I think this year it will not be all about Lending Club. Prosper has an excellent chance to establish themselves as the strong number two in the p2p lending space.

Clearly this is a shot in the arm for Prosper at a time when they need it. I expect we will see increased volume at Prosper very soon, probably as soon as the Prosper Funding LLC changes are implemented on February 1st. I will be in regular contact with the new management team and will report back on new changes as they happen. The next few months will be very interesting.

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Comments

On the contrary, I view this as a negative sign coming out of Prosper. Things are clearly not going too well if new management and funding is needed. But I suppose we already knew things weren’t going well over at Prosper just by looking at their monthly loan volume charts. I’m going to continue to pull my money out of Prosper and direct more of my portfolio towards Lending Club.

I certainly understand your position in moving to LC but I think it is a stretch to call this news a negative sign. We all knew that Prosper needed a new round of funding some time in the first quarter. While there has been plenty of negative news these past few months a new CEO and executive team can really make a difference. Time will tell of course, but I am continuing to add new money into Prosper.

No, I do not. Is it really that unreasonable that I would want to pull my money out of Prosper and put it into Lending Club? Lending Club is the clear winner of the two and I feel more comfortable having my money in a profitable company with a loan volume that keep increasing month after month.

Andrew N – I don’t think anyone would attempt to convince you otherwise if you wanted to move your money to LC, much less care. But I do find it interesting that you suggest change is negative for a company that wasn’t performing well. If your employer was failing, would you want them to say “lets all sink together…and find another job tomorrow” … or attempt to change/adapt? Prosper’s burn-rate hasn’t been a secret, and as with many start-ups a couple rounds of funding is necessary before stability occurs. LC achieved it first, Prosper has yet to do so.

Is Ford the “clear winner” because they didn’t require a bail-out? Perhaps. But GMC and Chrylser are still selling cars today, right?

Ultimately, all I care about is that I achieve over 16% XIRR on Prosper and around 11% on LC. My investments will continue to go to Prosper. Especially with the bankrupty vehicle in place. It’s a simple math decision when it comes to money.

Fair enough Dan. I just feel that Prosper has a going concern risk that Lending Club does not. I do not want to accept that risk so I’m pulling out. I hope everyone investing in Prosper continues to do well though.

New funding is a good sign for Prosper. Hopefully, now they can spend more on sales and marketing. They have a good platform technologically but marketing need to be improved. With Dawn gone, I expect new initiatives on marketing side and less focus on cost.

With lending club more and more acting as loan broker for non-banking financial institutions, hopefully Prosper can take advantage and fill the p2p platform gap.

If you are looking to Prosper to morph into a pure p2p play and eschew the big institutional money I think you will be disappointed. Peer to peer lending is becoming an asset class and both Prosper and Lending Club will provide a mix of retail and institutional investors going forward.

This is unquestionably good news. The main worries about Prosper heading into 2013 were bankruptcy protection for investors and the need for VC funding. Both have been addressed. There’s clearly an appetite from VC for this business. The lawsuit is lingering, but I agree with Peter that it’s a known issue, and the people who matter most are not hesitating to move forward. This is no time to be scared about using Prosper to invest. Personally, I continue to prefer them over Lending Club.

I agree that two of the main issues Prosper needed to address were the bankruptcy remote vehicle and more VC funding. The third and I believe the most pressing issue is the declining loan volume during the 4th quarter. Now, we need to see what difference these first two factors can make. Prosper needs strong volume in February and March and I think they will get it.

Of course that presumes that “the people who matter most”, as you put it, i.e. the “big money” are always necessarily the “smart money”. Looking back at the previous 6 (or is it 7) financing rounds, & the valuations etc, I wouldn’t relish the opportunity to argue that particular case. I’m just sayin’

“Time will tell of course, but I am continuing to add new money into Prosper.”

Ditto Peter. I increased my investment in my Prosper cash account 30% today due to this news. I’ve always like how the Prosper platform worked and I make better returns with them than LC, I was holding out for a major change. Just like your Christmas Wishlist for Prosper stated… Santa was just late with the present.

With the good news out ……do you anticipate the likes of worthblanket, MI2 and, reflective rupee to start lending again? I believe February will be an interesting month for available loans and big lenders.

Jack……….. If worthblanket, MI2 & reflective rupee all come back, as you suggested, February will indeed be an “interesting” month for available loans…………..in that there won’t be many & the discussion of institutional & big investors “taking over” will once again be the topic of lament around here.

I will be very surprised if Worthblanket2, MI2 and others don’t come back in February. But as Dan points out this may cause the same old problem we had last year. I mentioned that very concern to Ron Suber when we chatted yesterday, that the retail investor will be left out in the cold again and he said that both types of investors are important to Prosper. He mentioned several ideas that would make it much fairer than it is now so I am hopeful but only time will tell.

It is naive to believe that the lawsuit is nothing to be concerned about. Do you know that just a few days ago Prosper lost big time in court? Prosper lost its motion for summary judgment, lost its motion for summary adjudication, and lost its motion to seal certain evidence it contended was confidential. http://webaccess.sftc.org/Scripts/Magic94/mgrqispi94.dll?APPNAME=IJS&PRGNAME=ROA22&ARGUMENTS=-ACGC08482329 The class action is now going to go to trial, where Prosper will likely lose and lose big. Indeed, even with the $20M funding, a big judgment in the class action will very possibly bankrupt Prosper. And I suspect that the Prosper Funding LLC maneuver isn’t going to work out as Prosper hopes.

Ira01, I did hear about the setbacks for Prosper in court last week but what is curious to me is that none of the parties involved in today’s news considered those setbacks important. Or at least not important enough to reconsider their position.

Now, I am not a lawyer so I can’t begin to make an informed decision about the class action lawsuit. All I can do is listen to what others say and watch what others do. Now, maybe it is naive as you say, but I have little doubt that the lawyers at Sequoia as well as the lawyers of the new executive team looked at the suit very closely. They obviously believe that if Prosper loses it will not lose big.

While I like to consider myself capable of independent thought when it comes to complex legal matters I feel that my opinion is no more valid than anyone else’s. If I had unlimited resources I would hire a class action lawyer to take a look at the lawsuit and provide an independent opinion. I don’t have such resources and since I have found no one to go on the record about this matter I have not covered it more than peripherally. Once the judge makes a final ruling on the case, whatever that ruling may be, I will certainly cover it here. Until that happens I don’t intend to spend much time on it.

I certainly understand about limited resources. And I understand about the dearth of people willing to go on record. But despite these barriers, you’ve nevertheless elected to go on the record reflecting only one side of the question…

“I have never covered this lawsuit simply because I have been told by several people that it has very little merit and WILL NOT SUCCEED.” (All-caps mine.)

Given insufficient resources to investigate both sides of the question, I respectfully submit that you do LendAcademy’s audience a disservice by representing the one side without also disclaiming that you’re unable to dig into the other side.

I think Peter gets too much flak. It’s a free website, and he provides timely information we’d have a hard time getting on our own. He also gives commenters plenty of room to air their grievances, even when almost any blog post devolves into the same old debates. I wouldn’t blame him if he goes the way of LendStats and says it’s too much work for too little reward …

Ira01 — I’ll repeat something I said in the forum, which is I think the bottom line for most of us here regarding Prosper is that we don’t want to lose our money. Personally, I could care less if Prosper lives or dies as long as my investments continue to be serviced as intended, i.e. people are able to make loan payments and I benefit by earning interest. In my opinion, in a worst-case scenario Lending Club (or another opportunistic company) would have an interest in acquiring Prosper to save the loans and gain the customer base. It’s clear that the 2.0 version of P2P lending is a viable, even game-changing industry. You are free to rant about the lawsuit (although I’m not sure what you’re getting out of it), but even if you are right — so what? I think some smart business minds who are not naive might disagree with your end game.

Hippo387, That has been my point all along. I don’t believe the lawsuit will have a material impact on Prosper investors whatever happens. Because even if Prosper were to get a large judgment against them and declare bankruptcy (which in my opinion is unlikely) I think there would be many willing organizations who would jump at the chance to pick up the pieces. And if Prosper can get back on a rapid growth trajectory again then they would become an even more attractive acquisition target. The class action lawsuit is just a one time expense after all.

After writing about how you are not a lawyer, can’t afford to hire a lawyer, and no one is willing to go on the record with you, I find it comical that you nevertheless feel free to opine that it is “unlikely” that “Prosper were to get a large judgment against them and declare bankruptcy.” Given Prosper’s recent losses in court, I believe that it is almost a foregone conclusion that Prosper will lose the lawsuit (hardly surprising since the SEC already determined, years ago, that prosper broke the law by selling unregistered securities), and that it will lose big. The remedy for people who buy unregistered securities is elective rescission. Lenders would get to choose whether to force Prosper to repurchase their loans (and pay them interest at the statutory rate to boot). That could easily cost Prosper $50 million. That amount would almost certainly bankrupt Prosper. And if that happens, if I were a current lender, I wouldn’t be so confident that my loans will continue to get serviced (and that they won’t wind up getting taken away from me, at least in part, to help satisfy the class action judgment).

Ira01, You seem very confident in your assessment of the lawsuit. I know you are a lawyer and so you can make a more informed opinion than me. But you again assume that if Prosper loses it will lose big. If it was that clearcut why on earth would anyone invest, let alone one of the most successful VC’s in the history of Silicon Valley?

You can call me naive and comical or any other adjective you like but I happen to think that the lawyers at Sequoia know more about the likely outcomes of this case than me. Do you really think they would invest close to $20 million if they thought the lawsuit could be a $50 million loss to Prosper?

Later this year (hopefully) the lawsuit will reach a conclusion. Then one of us will be proved right. My money is on the lawyers at Sequoia and that Prosper will live on.

Unfortunately, the lawsuit will not reach a conclusion anytime soon, unless Prosper settles it (which is certainly a good possibility). If it goes to trial, even if a trial occurs this year (which is likely), whichever side loses will appeal — which would probably take about 2 years to resolve.

As to why Sequoia invested $20M despite the lawsuit, who knows. But my guess is that the price (about 14 cents a share) was so low compared to previous funding rounds, that they figured it was worth the gamble. Also, it is unclear whether they had already committed the funding when the Court made its summary judgment ruling. If so, they might have been thinking that Prosper would win on summary judgment, and by the time they found out that was not to be, it was too late. I don’t know.

Honestly, though, at this point I really don’t see how Prosper can win. It seems pretty clear now that the P1 loans were securities (as the SEC already determined), and it is undisputed that they weren’t registered. Thus, Prosper loses. Now it is true that there is more wriggle room with regards to damages, but even there, it seems to me that Prosper is either facing a big judgment or a huge judgment. That is why it would be in Prosper’s best interest to settle the case as quickly as possible — pay the money, put the case, and its potentially ruinous liability behind it, and move on. Perhaps that is what Prosper is already planning, I have no idea. And while I have no inside information as to the class or the thinking of its counsel, I can’t imagine that the class would agree to a settlement of less than around $15M. That’s a big number for Prosper, although a lot better than $50M.

Ira01, Help me understand why a lawyer would spend this much time and energy attempting to discredit a bloggers personal opinion of a legal matter (to which of course Peter is free to ‘opine’, is that not what blogging is about), and to which you admit you have no inside information… and then you discredit the legal team behind Sequoia’s investment as $20M would be “worth the gamble”.

Peter, I support hippo387’s comments earlier. A majority of us appreciate the community you’ve built hear and enjoy the candid discussion and debates you introduce to us. I also appreciate hearing your opinion on matters, be-it not supported with a legal degree.

“After writing about how you are not a lawyer, can’t afford to hire a lawyer, and no one is willing to go on the record with you, I find it comical that you nevertheless feel free to opine that it is ‘unlikely’ that ‘Prosper were to get a large judgment against them and declare bankruptcy.'”

The “I find it comical that” part seems extreme, but I otherwise agree.
You say you have insufficient resources to form an opinion. Yet you provide one – and one that falls on the side of supporting your referral links. Meanwhile, everybody’s free, of course, call into question the motivations of ira01 or myself or to just sweep our comments under the label “flak”. But still, there it is.

NewHorizon, I have stated here many times that I am not an impartial observer, that I am a p2p lending cheerleader. I have $50K+ invested in Prosper and as you point out I also earn affiliate income from referring investors and borrowers to Prosper as well as Lending Club.

I completely agree that I provide a positive spin on p2p lending on this blog. If you had been a long time reader you would know that I often get called out on that. Just look for comments from Dan B, Roy S or many others who have disagreed with my position. That is fine, I welcome discussion and disagreement.

The difference between this community and the prospers.org community is, in my opinion, that most people here are active investors who want to learn and also want a thriving p2p lending industry with two strong competitors. Whereas at .org most people just want to see Prosper die for reasons that are still unclear to me.

Why use other forums as a way to side-step the part where you offer comments about not having the means to form an opinion, and yet provide one anyway? I’m all in favor of supporting “active investors who want to learn.” But how is any of this (your .org distraction and the contrary comments) not confusing to them?

Impartiality issues aside, me-thinks the question just comes down to: you have the means to form an objective assessment or you don’t. Your comments seem inconsistent on this point.

And then finally I think we can also agree from what you’ve already said that not only do onlookers like myself have fewer sources than you, but that the sources you have which us onlookers lack all have financial stakes in the industry.

If we are indeed agreed on this, then I would submit that it’s a disservice to your readership to characterize your information simply as “incomplete”. Rather, arithmetic says that your sources, in aggregate, from which your opinions are formed, are more likely to be “unbalanced”.

I can’t disagree with that. For the most part my sources have a vested interest in providing a rosy picture of things. But if I felt that reality was vastly different from that I would question it. With this latest news I keep coming back to the one piece of information we can all agree on. One the most successful VC companies in history just invested a large sum of money in Prosper. If they thought there was a good chance of a $50 million settlement against Prosper I think we can safely say they would not have done this. So, you can see how that one objective fact does lend support to my rosy picture of things.

Meanwhile, $20mil is HUUUGE to you and me, but not to Sequoia. It’s just “let’s give THIS one a try” money. It doesn’t mean the needle is pegged on the confidence meter. And $20 mil is the latest of a total of, what, $95mil in funding so far? The first $75mil having already been spent and Prosper still not profitable since inception. (I know, I know: onlookers are saying, “But things are different now!”)

Point being that Sequoia is in a position to throw $20mil to moderately high-risk ventures to see if it sticks. (I’m not necessarily saying Prosper is moderately high-risk. Only that Sequoia can take on high-risk ventures.) I agree that each round of funding is good news for Prosper. Can’t deny that. But nobody should assume risks are low solely because they stand in awe of Sequoia’s $20 million.

NewHorizon,
Thank you for that last post. Though I’m more pro-Prosper still, your post finally sheds some light on why the $20M round of funding may not be the huge success some of see it as. This is now a more logical debate worth following, and far less seeming of a ‘rant’.

Thanks Terry. And if I get but a hint of approval from hippo, I can die happy.

I used to work in a dot-com company during the dot-com bubble which, the company touted, received $10mil in funding from MicroSoft. I was rather impressed – feeling pretty special – until I realized how common it was for MicroSoft to throw 10-million-dollar checks around.

Be happy NewHorizon — I do appreciate the discussion, I just like to know where people are coming from. It’s the internet, so it pays to be skeptical of anyone who claims to have great information without telling you why they are even commenting. Of course, self-disclosure could be misleading too–Peter Renton could be Lennay Kekua for all we know. Heh heh.

Anyway, as to the Sequoia investment, it may or may not be much for them but it is significant for Prosper, which needed the VC capital. As a single bullet point, it’s good news for them. Only time will tell if Prosper succeeds or not and we will all find out (and someone will eat crow). Hopefully this particular discussion has run its course.

Great news for Prosper.
I personally had opened accounts at Prosper first, then at Lending Club simultaneously to try both out.
Yes, returns were better at Prosper, yet so were the risks, and their methodology of selection of loans on both platforms (Lending Club), need more work. (ex. A 700+FICA after 1-2 payments, then stops paying on a verified borrower loan- then can’t be found, nor reached!, then goes into default!). How much verification truly goes into the loans?
If lenders were more confident in and had more data, P2P would explode upwards. I know I would be investing some serious money.
I began pulling away from Prosper, after finding out that any late loans could not even be sold at a discount on the trading platform!
I am a firm believer in the business models, yet they need to be more transparent, and I am currently for the past few years, cautiously increasing funds devoted to this sector, yet w/LC only.
Perhaps they all will become more lender friendly, and provide more data, as well as more criteria on loans to choose from…we shall see….wishing good luck to Prosper, LC, and all B’s and L’s:)

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[…] Peter Renton on April 17, 2013 TweetIt has been nearly three months now since the new executive team took over at Prosper and the changes keep coming. We all know about the new look they launched two weeks ago but there […]

[…] Compared to Lending Club, Prosper seems lucky to be in business. Their first-mover advantage turned out to work against them, and as pointed out by Peter Renton’s LendAcademy.com they’re practically rebooting the whole operation this year. […]

[…] volume. Ron Suber, now President, but previously Head of Global Institutional Sales, shared that his focus was on institutional investors. This push began what has now been a 21-month facelift of the dollars that invest on the […]

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